Kind of Like Star Wars all Over Again

Remember SDI? There’s a good chance you don’t because as soon as Ronald Reagan announced his plan to develop a missile-defense system, his opponents mocked the program, calling it “Star Wars” rather than using the proper name, “Strategic Defense Initiative,” or SDI. In effect, SDI broke the back of the Soviets and ushered in a new global order with the United States as the world’s sole superpower.

There’s another acronym you might want to get familiar with: SDR. Like SDI, SDR could become a catalyst that causes a major shift in world power—a shift away from the dollar as the world’s major reserve currency.

SDR stands for “Special Drawing Rights.” Special Drawing Rights are an international quasi-reserve currency created by the International Monetary Fund (IMF) in 1969 for governments around the world to finance deficits. The IMF was created in 1947 following the “Bretton Woods” agreement among World War II Allies, held at the Mount Washington Hotel in Bretton Woods, New Hampshire. The goal was to create an international monetary system with the gold-backed U.S. dollar as the world’s reserve currency.

Is your brain melting yet? Okay, let’s slow down with the details: Suffice it to say that SDR is a form of international currency dealt to international governments by the IMF, comprised of a "basket" of international currencies consisting of the dollar, the euro, the pound sterling, and the Japanese yen. Good enough for now.

“Wishing,” you’re saying, “why should I care?” Good question.

Here’s why: Keep your eyes on the news as we witness the potential decline of the dollar and the world’s wealth. At the G-20 summit in London last March, the IMF decided to raise money by issuing a never-before-seen bond—a bond backed by, you got it, SDRs. Last week China fired a financial shot across the bow of the sinking ship U.S. Treasury. It announced that it wants to buy up to $50 billion in bonds backed by SDRs. Russia wants $10 billion and so does Brazil .

Again, “Wishing, why should I care?” We Americans should care because China and other foreign nations have been financing our massive deficit spending by buying our U.S. Treasury bonds. The Chinese hold about $2 trillion in dollar-denominated reserves, including about $700 billion in U.S. Treasury bonds. Bottom line: China is getting tired of the spending shenanigans of our Congress and financing frivolities of the Federal Reserve that could lead to a massive devaluation of the dollar.

Imagine this: China is holding $2 trillion in dollar-denominated reserves. Of course, we pay China interest and principal in dollars. Because the Federal Reserve is creating a massive amount of dollars out of thin air to jump start the economy, to bail out Wall Street and Detroit, and because America has an $11-trillion deficit and another $100 trillion or so in unfunded liabilities, the U.S. dollar could drop in value significantly, generate inflation like we’ve never experienced … and depreciate the value of China’s holdings. What would you do if you were the governor of the central bank of China? Hmmm, maybe you would tell the United States to get its financial house in order. Maybe you would call for the end of the dollar as the world’s dominant reserve currency and suggest that the dollar be supplanted by SDRs. And maybe you would start to diversify your government bond purchases away from U.S. Treasury bonds and into alternatives like SDR bonds.

The Chinese are doing all these things. Can you blame them? Please keep this move by China in perspective. They are not acting radically. They are trying to protect their financial holdings. If they move too dramatically from the dollar, they stand to lose a lot of money quickly. China is moving, but moving cautiously.

By the way, it’s a bit ironic that China called for the end of the U.S. dollar as the world’s reserve currency on March 23—the same day that Ronald Reagan announced SDI in 1983.

"Reprinted with permission of WORLDmag.com. To read more news and views from a Christian perspective, call 800-951-6397 or visit http://www.worldmag.com/ ."

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I thought that the idea of capitalism was about accountability with risk. If you have the right business plan, you profit. If you have the wrong business plan, you lose.

By bailing out the banks, Wall Street, and Detroit, the US Government has effectively created moral hazard where the decision makers are insulated from the risks. This is part of what led to the crisis that is going on.

Stop bailing out failed businesses, and let them die, rather than taking organ transplants from a healthy person to prop up a dying dinosaur. If the US economy is going to prosper, it is time to allow nature to take its course in the economic sphere.

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